Accrued Revenue Meaning Overview How To Interpret

Accrued Revenue Meaning

Redfin Corporation reported such accrued revenue of $12.09 million in the March’18 quarter and $13.3 million in the December ’17 quarter.

Understanding Accrued Revenue

Accrued revenue is a part of the sale recognized by the seller but not yet billed to the customer. This concept is mostly used in businesses where revenue recognition is delayed for an unreasonable longer period.

It is common in industries where billings to customers are delayed for several months until a designated milestone is reached (in terms of percentage completion) or until the end of the project. However, it is much less commonly used in manufacturing businesses, where invoices are usually issued as soon as products are shipped.

Let us consider the case study below.

XYZ International is having a consulting project with one of its large clients, under which the agreement delineates two milestones for billing, after each of which the client owes $60,000 to XYZ as the agreement is such that it only allows for billing at the end of the project for $120,000. Therefore, XYZ must create below is the accrued revenue journal entryAccrued Revenue Journal EntryAccrued Revenue is revenue that the seller recognizes but does not bill to the customer. As an asset, accrued income is debited at the time of recording. At the time realization of this income, accrued income account is credited to diminish the asset value.read more to record reaching the first milestone:

At the end of another two months, XYZ completes the second milestone and bills the client for $120,000. XYZ records the following is the journal entry to reverseEntry To ReverseReversing entries refer to those journal entries passed in the current accounting period to offset the entries for outstanding expenses and accrued income recorded in the immediately preceding accounting period.read more the initial accrual and, after that, records the second entry for the $120,000 invoice:

Debit balances related to accrued billings are recorded on the balance sheet, while the consulting revenue change account appears in the income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more.

The reverse of deferred revenue, i.e., accrued service revenue, can also arise when customers pay in advance but the seller has not provided services or shipped goods. In that case, the seller initially records a liability for the received payment and later realizes the sales related to the same when the transaction is completed.

How to Interpret?

Accrued revenue is shown as an asset on the balance sheet, but it’s not always as valuable an asset as liquid cash. It takes effort related to billing and collection from the customer to convert it into cash. Having large amounts of accrued revenue can adversely impact the working capital cycle. It can be a sign that a company isn’t efficient in getting its customers to pay for its services.

This concept is required to match revenues with expenses properly. The absence of accrued revenue may present excessively low initial revenue and low profits levels for a business, which does not indicate the true picture of the entity. Also, not using such accrued revenue may result in lumpier revenue and profit recognition as revenues are only recorded when invoices are issued, typically after longer intervals.

Accrued Revenue Meaning Overview How To Interpret